US dollar tumbles most in a year as traders bet on end to US rate hikes
Sign up now: Get ST's newsletters delivered to your inbox
A Bloomberg gauge of the US dollar fell as much as 1.3 per cent, the largest such drop since Nov 2022.
PHOTO: REUTERS
Follow topic:
New York – The US dollar tumbled by the most in a year after soft inflation data led traders to ramp up bets the US Federal Reserve will start cutting interest rates
A Bloomberg gauge of the US dollar fell as much as 1.3 per cent, the largest such drop since November 2022, following a report that showed US headline and core inflation
The euro climbed as much 1.8 per cent to 1.0887, the biggest intraday move in a year and highest mark since August, while the yen jumped more than 1 per cent to top the 150 per US dollar level.
The Singapore currency was relatively unchanged from overnight at 1.3491 per US dollar.
The release of the data set off a major shift across world financial markets, with traders anticipating that the Fed’s aggressive rate hikes will succeed in reining in the worst inflation surge since the 1980s.
That sent bond yields sliding, sapping the incentive for overseas investors to shift money to the US and fuelling a rally in risk assets like US and emerging market stocks.
The US dollar had rallied for much of 2023 on the back of rising Treasury yields.
But that dynamic kicked into reverse on Tuesday, when it lost ground against almost all of the world’s major currencies as traders priced in expectations that the Fed will cut its benchmark rate by about half a percentage point by July.
“Over recent weeks, it seemed as if there was a reluctance to buy into the dollar on data which supported the Fed’s higher-for-longer narrative,” Mr Simon Harvey of Monex said. “It isn’t surprising to see European and high-beta forex rally against the dollar as rate cut expectations are brought forward.”
Among the so-called Group of 10 currencies, the Australian dollar rallied as much as 2.1 per cent, the largest boost since January, while the Swedish krona advanced as much as 2.5 per cent in its best day since July.
The yen pulled back from close to a 33-year low against the greenback, a level that had traders braced for possible intervention from Japan to support the beleaguered currency.
Japanese Finance Minister Shunichi Suzuki had warned repeatedly this week that the government will respond to excessive moves.
Fed swap contracts indicate that the odds of another rate increase have fallen to nearly zero, with the timing of a first anticipated rate cut pulled up to May or June.
Treasuries rallied across maturities, with the yield on the five-year tenor falling as much as 25 basis points to a low of 4.41 per cent.
The options market sees the drop in the US dollar helping to balance currency positions. An index of three-month volatility on the index sunk to its lowest level since February 2022.
“The markets have moved to price in more rate cuts next year and pulling forward the start to the easing cycle,” said Mr Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US.
He said there is a “lack of fundamental data in the short term, the high probability of no hike in December and a market that is wrong-footed that could give this rally some legs”. BLOOMBERG
